[House Hearing, 112 Congress]
[From the U.S. Government Publishing Office]



 
                  IMPROPER PAYMENTS: FINDING SOLUTIONS

=======================================================================

                                HEARING

                               before the

                SUBCOMMITTEE ON GOVERNMENT ORGANIZATION,
                  EFFICIENCY AND FINANCIAL MANAGEMENT

                                 of the

                         COMMITTEE ON OVERSIGHT
                         AND GOVERNMENT REFORM

                        HOUSE OF REPRESENTATIVES

                      ONE HUNDRED TWELFTH CONGRESS

                             FIRST SESSION

                               __________

                             APRIL 15, 2011

                               __________

                           Serial No. 112-26

                               __________

Printed for the use of the Committee on Oversight and Government Reform


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                      http://www.house.gov/reform



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              COMMITTEE ON OVERSIGHT AND GOVERNMENT REFORM

                 DARRELL E. ISSA, California, Chairman
DAN BURTON, Indiana                  ELIJAH E. CUMMINGS, Maryland, 
JOHN L. MICA, Florida                    Ranking Minority Member
TODD RUSSELL PLATTS, Pennsylvania    EDOLPHUS TOWNS, New York
MICHAEL R. TURNER, Ohio              CAROLYN B. MALONEY, New York
PATRICK T. McHENRY, North Carolina   ELEANOR HOLMES NORTON, District of 
JIM JORDAN, Ohio                         Columbia
JASON CHAFFETZ, Utah                 DENNIS J. KUCINICH, Ohio
CONNIE MACK, Florida                 JOHN F. TIERNEY, Massachusetts
TIM WALBERG, Michigan                WM. LACY CLAY, Missouri
JAMES LANKFORD, Oklahoma             STEPHEN F. LYNCH, Massachusetts
JUSTIN AMASH, Michigan               JIM COOPER, Tennessee
ANN MARIE BUERKLE, New York          GERALD E. CONNOLLY, Virginia
PAUL A. GOSAR, Arizona               MIKE QUIGLEY, Illinois
RAUL R. LABRADOR, Idaho              DANNY K. DAVIS, Illinois
PATRICK MEEHAN, Pennsylvania         BRUCE L. BRALEY, Iowa
SCOTT DesJARLAIS, Tennessee          PETER WELCH, Vermont
JOE WALSH, Illinois                  JOHN A. YARMUTH, Kentucky
TREY GOWDY, South Carolina           CHRISTOPHER S. MURPHY, Connecticut
DENNIS A. ROSS, Florida              JACKIE SPEIER, California
FRANK C. GUINTA, New Hampshire
BLAKE FARENTHOLD, Texas
MIKE KELLY, Pennsylvania

                   Lawrence J. Brady, Staff Director
                John D. Cuaderes, Deputy Staff Director
                     Robert Borden, General Counsel
                       Linda A. Good, Chief Clerk
                 David Rapallo, Minority Staff Director

   Subcommittee on Government Organization, Efficiency and Financial 
                               Management

              TODD RUSSELL PLATTS, Pennsylvania, Chairman
CONNIE MACK, Florida, Vice Chairman  EDOLPHUS TOWNS, New York, Ranking 
JAMES LANKFORD, Oklahoma                 Minority Member
JUSTIN AMASH, Michigan               JIM COOPER, Tennessee
PAUL A. GOSAR, Arizona               GERALD E. CONNOLLY, Virginia
FRANK C. GUINTA, New Hampshire       ELEANOR HOLMES NORTON, District of 
BLAKE FARENTHOLD, Texas                  Columbia


                            C O N T E N T S

                              ----------                              
                                                                   Page
Hearing held on April 15, 2011...................................     1
Statement of:
    Werfel, Daniel I., Controller, Office of Management and 
      Budget; and Kay L. Daly, Director, Financial Management and 
      Assurance, Government Accountability Office................     5
        Daly, Kay L..............................................    17
        Werfel, Daniel I.........................................     5
Letters, statements, etc., submitted for the record by:
    Daly, Kay L., Director, Financial Management and Assurance, 
      Government Accountability Office, prepared statement of....    19
    Werfel, Daniel I., Controller, Office of Management and 
      Budget, prepared statement of..............................     7


                  IMPROPER PAYMENTS: FINDING SOLUTIONS

                              ----------                              


                         FRIDAY, APRIL 15, 2011

                  House of Representatives,
Subcommittee on Government Organization, Efficiency 
                          and Financial Management,
              Committee on Oversight and Government Reform,
                                                    Washington, DC.
    The subcommittee met, pursuant to notice, at 10:07 a.m. in 
room 2157, Rayburn House Office Building, Hon. Todd R. Platts 
(chairman of the subcommittee) presiding.
    Present: Representatives Platts, Lankford, Amash, Guinta, 
Towns, Norton, and Connolly.
    Staff present: Ali Ahmad, deputy press secretary; Michael 
R. Bebeau, assistant clerk; Robert Borden, general counsel; 
Adam Bordes, senior policy analyst; Christopher Hixon, deputy 
chief counsel, oversight; Tabetha C. Mueller, professional 
staff member; Noelle Turbitt, intern; Beverly Britton Fraser, 
counsel; Cecelia Thomas, counsel/deputy clerk.
    Mr. Platts. The subcommittee hearing will come to order.
    Before I begin the opening statement, I just want to 
apologize for the slight delay in starting. I anticipate that 
we will get through any opening statements from me and the 
ranking member and our witnesses. We are likely going to have a 
single vote. About that time, we will break, vote, and come 
back and do a Q and A after that vote. We will try to be as 
efficient as we can so as not to keep you any longer than 
necessary, but rather, have our discussion.
    As an oversight committee, we exist to secure two 
fundamental principles. First, Americans have a right to know 
that the money Washington takes from them is well spent. 
Second, Americans deserve an efficient, effective government 
that works on their behalf.
    Our duty on the Oversight and Government Reform Committee 
is to protect these very important rights. Our solemn 
responsibility is to hold government accountable to taxpayers 
because taxpayers have a right to know what they get from their 
government. We will work tirelessly in partnership with citizen 
watchdogs to deliver the facts to the American people and to 
bring genuine reform to the Federal bureaucracy. This is the 
mission of the Oversight and Government Reform Committee.
    Today's hearing on Improper Payments continues our 
subcommittee's examination of Federal financial management 
issues. It also affords us, first, the opportunity to review 
the newly enacted Improper Payments Elimination and Recovery 
Act of 2010.
    I welcome our witnesses and thank them for their efforts, 
both the written testimony you have provided as well as your 
testimony you will provide here today.
    The Honorable Daniel Werfel is the Controller and Director 
of the Office of Federal Financial Management at the Office of 
Management and Budget, and Kay Daly is the Director of 
Financial Management and Assurance at the Government 
Accountability Office. We are grateful both of you are a part 
of this hearing.
    As millions of Americans file their income taxes today, 
because of a holiday here, they have a couple of extra days 
through Monday, the 18th, as opposed to the traditional April 
15th, it is important for those of us in the Federal Government 
to take a step back and remind ourselves of the responsibility 
we have to spend those tax dollars wisely.
    First and foremost, that responsibility means we need to 
make sure that funds are being spent the way they are intended 
to be spent. Unfortunately, the total dollar amount of improper 
payments, which could be anything from payments without 
documentation to outright fraud, is staggering.
    As both our witnesses note in their testimony, Federal 
agencies reported an estimated $125.4 billion in improper 
payments during the fiscal year 2010. As a point of reference, 
the President requested $125.1 billion to fund the entire 
Department of Veterans Affairs in 2012.
    I well remember conducting a hearing in May 2003 when the 
estimated improper payments was $35 billion. It is important to 
be clear that the increases year after year are a result of 
better detection and reporting. That is a very good thing 
because as it shows, we are identifying the problem. The fiscal 
year 2010 financial report actually found the estimated error 
rate went down about half a percentage point.
    That being said, we still have a responsibility to the 
people paying their taxes today to do the best we can in 
handling their hard earned funds. The total amount of improper 
payments is very troubling. Even with the small drop in the 
error rate, the dollar amount increased by $16 billion, enough 
to fund the FBI, the DEA and the U.S. Marshals Service for 1 
year.
    In response to these concerns, this committee played a key 
role in the passage of the Improper Payments Elimination 
Recovery Act and I certainly recognize then chairman of the 
full committee, Mr. Towns, for his committee's leadership and 
work on this issue.
    The purpose of IPERA was to strengthen agency governance 
practices by incorporating a more stringent risk and 
performance framework for agencies to measure program outcomes. 
It expands the use of recovery audits and business analytics to 
help agencies recoup improper payments. These are common sense 
changes that buildupon prior requirements.
    Focusing on eliminating improper payments goes to the very 
heart of accountability. I believe the American people are 
looking to us for action and solutions. I was pleased to see 
that both of our witnesses point to examples of success stories 
in your testimony. I would like this hearing to be about those 
types of successes, about solutions.
    Technology is certainly a part of the solution and we have 
access to tools that weren't even invented when the Improper 
Payments Information Act was passed in 2002. Tools such as 
continuous transaction monitoring and business intelligence can 
help the government move toward a ``prevent and detect'' model 
other than the old ``pay and chase'' scheme.
    Technology can only go so far. As always, sound internal 
controls are the better opt for any successful, sustainable and 
cost effective solution. Agencies need to understand the root 
causes of errors and to develop better controls to prevent or 
detect them before the money goes out the door.
    One way to improve internal controls is to have a third 
party evaluate them. I was pleased to see your testimony 
addressed the issue of shifting audit resources to provide more 
scrutiny for payment activities.
    Mr. Werfel, I see that you make reference to the upcoming 
report on the CFO Act in your testimony and I am looking 
forward to those recommendations to get additional ideas on how 
to better leverage our audit resources to focus more on 
accountability and internal controls.
    Again, I thank you for your appearance here today and look 
forward to your testimony.
    With that, I yield to the distinguished ranking member, Mr. 
Towns, for his opening statement.
    Mr. Towns. Thank you very much, Mr. Chairman.
    Let me thank both of you for your service.
    This is a very important and timely hearing. I thank you 
for holding it, Mr. Chairman.
    Mr. Werfel, it is good to see you again. Ms. Daly, welcome. 
I am looking forward to your testimony as well.
    Even as the economy begins to recover from the last 
recession, the Federal Government still faces fiscal challenges 
in cutting spending and raising revenue. This subcommittee has 
continued to explore ways the government can save money and 
close the deficit.
    Mr. Werfel, the last time you visited with us, you gave us 
an excellent overview of the current financial conditions of 
the Federal Government as we looked at the consolidated 
financial statements. Today, we focus on the reduction of 
improper payments. We look to you and Ms. Daly to provide us 
with deeper insights on how we can quickly begin to conserve 
our financial resources by eliminating and recapturing improper 
payments.
    President Obama's administration has put forth very robust 
initiatives to eliminate improper payments which is one of the 
key components of the efforts to eliminate waste. I am 
encouraged to see that we have some positive results in 
response to these efforts.
    The President called for a do not pay list in June 2010, so 
that we don't keep giving money to the same ineligible 
recipients repeatedly. We now have the verified payment.gov Web 
site which allows agencies to check recipients' eligibility 
before they receive their Federal payments. This is a great 
beginning and I would like to hear more about this effort 
today.
    The President also asked agencies to be transparent about 
the amount of improper payment and to account to the American 
public for their actions in addressing these problems. I am 
pleased to see that we now have the payment accuracy.gov Web 
site that shows exact information. This is also a very good 
response.
    President Obama signed the Improper Payments Elimination 
and Recovery Act of 2010 into law last July. That law became 
effective in January 2011. I am looking forward to hearing 
about our progress under the new law as well. A healthy 
financial future for the United States requires sustained 
effort from more than one source. We must work together. We 
have to watch what we spend, get rid of waste, increase revenue 
and reduce improper payments, all at the same time to 
accomplish this goal.
    I am looking forward to working in a bipartisan way to 
reduce, to capture and to eliminate improper payments.
    On that note, Mr. Chairman, I yield.
    Mr. Platts. I thank the gentleman and certainly look 
forward, as well, to working together in that bipartisan 
fashion within the committee as well as with our executive 
branch colleagues.
    With that, I yield to the gentleman from Virginia, Mr. 
Connolly, for an opening statement.
    Mr. Connolly. Thank you, Chairman Platts.
    I want to thank you for holding this hearing to assess 
progress in reducing improper payments. Although this is a 
common topic of inquiry, sustained oversight can produce 
dividends for taxpayers by highlighting progress and 
identifying other opportunities for improvement.
    Congress and the administration have focused on reducing 
improper payments. President Obama issued Executive Order No. 
13520 reducing improper payments. President Obama also ordered 
that a do not pay list be created to avoid repeated improper 
payments and issued two memoranda to agencies to provide 
guidance in reducing improper payments.
    Despite these efforts, improper payments grew by $16 
billion in fiscal year 2010, indicating the need for further 
action. Therefore, Congress continued to ramp up efforts to 
reduce improper payments. During the last session, Congress 
included language to reduce improper Medicare payments in the 
Affordable Care Act, saving up to $80 billion annually.
    Congress also passed the Improper Payments Elimination and 
Recovery Act, as Mr. Towns just indicated, introduced by former 
Congressman Patrick Murphy and co-sponsored by many Members 
including yourself, Mr. Chairman.
    IPERA expanded reporting requirements and improved 
agencies' ability to recover improper payments. Many of IPERA's 
provisions became effective in fiscal year 2011, so we will 
need to continue monitoring its implementation to see how well 
it works and whether it can be strengthened.
    In his written testimony, Mr. Werfel, a familiar figure now 
here in this committee, I think we need to make him an honorary 
member at some point, Mr. Chairman, estimates the successful 
implementation of improper payment reduction programs could 
save $160 billion over 10 years, so there are substantial cost 
savings.
    There is evidence we already are making progress. While the 
total amount of improper payments grew during the last fiscal 
year, the improper payment rate across the Federal Government 
actually fell from 5.65 percent to 5.49 percent. While that 
still is far too high, it is important to recognize the 
progress agencies have achieved as this reduction in improper 
rates saved the taxpayers $4 billion and it is progress upon 
which we can build.
    I want to again thank you for holding the hearing and I 
look forward to hearing the testimony.
    Mr. Platts. I thank the gentleman.
    We will now move to opening statements of the witnesses. 
Again, we have the Honorable Daniel Werfel, Controller and 
Director of the Office of Federal Financial Management of the 
Office of Management and Budget. We certainly would be honored 
to have him as an honorary member. Whether he would be willing 
to associate himself with us, I am not sure.
    We also have Ms. Kay Daly, Director, Financial Management 
and Assurance, Government Accountability Office. We are always 
delighted and grateful to partner with GAO as well on your 
important work.
    It is the practice of the subcommittee that all witnesses 
be sworn before testimony. Please rise to take the oath.
    [Witnesses sworn.]
    Mr. Platts. The record will reflect that both witnesses 
answered in the affirmative. Again, we are grateful for your 
testimony.
    Mr. Werfel, would you like to begin?

STATEMENT OF DANIEL I. WERFEL, CONTROLLER, OFFICE OF MANAGEMENT 
AND BUDGET; AND KAY L. DALY, DIRECTOR, FINANCIAL MANAGEMENT AND 
          ASSURANCE, GOVERNMENT ACCOUNTABILITY OFFICE

                 STATEMENT OF DANIEL I. WERFEL

    Mr. Werfel. Thank you.
    Chairman Platts, Ranking Member Towns, Congressman 
Connolly, and distinguished members of the subcommittee, I want 
to thank you for inviting me to testify today. I appreciate the 
opportunity to discuss the Federal Government's current efforts 
to prevent, reduce and recapture improper payments, as well as 
how the audit process can be improved to focus on key 
programmatic issues like payment errors.
    As has been discussed in fiscal year 2010, Federal agencies 
estimated approximately $125 billion in improper payments were 
made to individuals, organizations and contractors. Although 
not all errors represent fraud, all payment errors degrade the 
integrity of government programs and compromise citizen trust 
in government.
    As part of the administration's Accountable Government 
Initiative, we have set aggressive goals to prevent $50 billion 
in improper payments and recapture at least $2 billion in 
improper payments between fiscal years 2010 and 2012. In 
addition to the enactment of IPERA, the administration is 
taking numerous steps to prevent, reduce and recapture improper 
payments.
    First, as mentioned earlier, in November 2009, the 
President issued an Executive order dedicated to the sole 
purpose of reducing improper payments. The order drives 
transparency, increased agency accountability and new 
incentives for State and local governments to reduce error.
    Second, last June, the President issued a memorandum to 
agencies on enhancing payment accuracy through a Do Not Pay 
list, as Congressman Towns referenced. The Do Not Pay list will 
serve as a single source through which all agencies can check 
the status of a potential contractor, grantee or individual 
beneficiary by linking the agency to relevant eligibility data 
bases such as the Social Security Administration's Death Master 
File and the General Service Administration's Excluded Party 
list.
    The initial portal has been built. However, full 
implementation of this Initiative will be done over several 
phases, including where we are now which is currently pilot 
testing the solution with Federal agencies.
    As envisioned, the Do Not Pay list, when fully operational, 
will not just be a data match tool, but will leverage cutting 
edge, fraud technology for a detection technology to further 
reduce the number of improper payments.
    Third, in March 2010, the President issued a memorandum to 
agencies directing them to intensify and expand their efforts 
to recapture error. We have set a goal of recovering at least 
$2 billion in improper payments between fiscal years 2010 and 
2012. I am pleased that in this area we are making significant 
progress in meeting this goal as agencies reported in fiscal 
year 2010 that they had recaptured $687 million improper 
payments which is nearly a 300 percent increase from prior 
recoveries.
    As you can see, we are working toward preventing and 
recapturing improper payments across the government. However, 
we are continuously looking for better and more creative ways 
to address these challenges. For example, a financial statement 
audit result addressed whether the agency had the appropriate 
accounting in place to record that a payment has occurred. 
However, the audit opinion too often stopped short of 
scrutinizing the integrity of that payment. This leads to a 
result where there is no correlation between an agency's 
ability to obtain a clean audit opinion on their financial 
statements and an agency's ability to mitigate instances of 
improper payments.
    I believe an important improvement that should be 
considered as we reexamine our Federal reporting model is 
holding the agency accountable as part of their financial 
statement audit for reporting the various root causes and 
components of their payment errors, identifying those areas of 
error that are within their direct and immediate control for 
the agency to mitigate, and then having the auditor evaluate 
whether the agency has taken sufficient action to mitigate the 
risk associated with such errors.
    I believe this proposed change would reinforce the Federal 
financial community's current focus and ongoing commitment to 
improving results in this area.
    I want to thank you again for inviting me to testify and I 
look forward to answering any questions you have.
    [The prepared statement of Mr. Werfel follows:]

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    Mr. Platts. Chairman Issa. Thank you, Mr. Werfel.
    Ms. Daly.

                    STATEMENT OF KAY L. DALY

    Ms. Daly. Thank you, Chairman Platts, Member Towns and 
Congressman Connolly.
    I appreciate the opportunity to be here today to discuss 
the governmentwide problem of improper payments in Federal 
programs and agencies' efforts to address key requirements of 
the Improper Payments Information Act of 2002, commonly 
referred to as IPIA.
    For fiscal year 2010, 20 agencies reported improper payment 
estimates for over 70 programs that totaled over $125 billion. 
This is an increase from the fiscal year 2009 estimate of about 
$109 billion, primarily due to increases in estimated improper 
payments for four major programs--Unemployment Insurance, 
Earned Income Tax Credits, Medicaid and Medicare Advantage.
    The agencies administering these programs reported that the 
increases in the estimates were primarily attributable to an 
increase in program outlay. That was the case for Medicaid and 
Medicare Advantage programs even though those two programs 
reported lower error rates. Both the Unemployment Insurance and 
Earned Income Tax Credit programs reported higher program 
outlays and higher error rates for fiscal year 2010 when 
compared to fiscal year 2009.
    Although overall improper payments rose by about $16 
billion, we view this as a positive step because it indicates 
that agencies have increased their efforts to identify and 
report improper payments which will ultimately improve 
transparency over the full magnitude of the improper payment 
problem. This is a critical first step in establishing 
effective accountability measures to reduce them.
    Some agencies reported they had made progress to reduce 
improper payments in their programs and activities. Since 
initiative IPIA implementation in 2004, we found that more 
programs are reporting every year and that 17 agency programs 
that had reported improper payment error rates from between 
2004 and 2010, reported reduced error rates in those programs. 
While these error rate reductions are promising, some major 
challenges do remain.
    For example, we found that the $125 billion improper 
payment estimate does not reflect the full scope of improper 
payments across all agencies. Seven programs that had been 
identified as susceptible to the risk of improper payments with 
2010 outlays totaling about $85 billion, did not report an 
estimate. Most notable of these is the Medicare Prescription 
Drug Benefit Program which had outlays of about $59 billion in 
2010 but has not yet reported a comprehensive estimate of 
improper payments. The program does expect to do so in fiscal 
year 2011.
    During fiscal year 2010, there were a number of actions 
taken intended to strengthen the framework for reducing and 
reporting improper payments. As we noted, the President signed 
the Executive order in November 2009 to increase transparency 
and accountability for improper payments and the President also 
issued two memoranda in June and March that were intended to 
expand efforts to recapture improper payments and also use 
recovery audits, in addition to establishing a Do Not Pay List.
    The President also set the goal to reduce improper payments 
overall by $50 billion and to recapture at least $2 billion by 
the end of fiscal year 2012. In addition, in July 2010, the 
Improper Payments Elimination and Recovery Act, commonly 
referred to as IPERA, was passed and is intended to enhance 
reporting and reduction of improper payments.
    IPERA established additional requirements related to 
Federal manager accountability, recovery auditing aimed at 
identifying and reclaiming payments made in error, and 
compliance and noncompliance determinations based on Inspector 
General assessment of whether an agency is meeting IPERA 
requirements. For example, IPERA required agency managers and 
the programs to be held accountable for achieving the agency's 
goal.
    In closing, we recognize that measuring improper payments 
and taking action to reduce them are not simple tasks. The 
ultimate success of the governmentwide effort to reduce 
improper payments hinges on each Federal agency's diligence and 
commitment to identify, estimate, determine the causes of and 
take corrective actions to reduce improper payments.
    Mr. Chairman, Ranking Member Towns and Representative 
Connolly, I would like to thank you for providing the 
opportunity for me to speak before you today. I also appreciate 
your commitment to addressing this serious problem. I would be 
pleased to respond to any questions you may have at the 
appropriate time.
    [The prepared statement of Ms. Daly follows:]

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    Mr. Platts. Thank you for your testimony. I appreciate both 
of you sharing your knowledge and insights.
    I will yield myself 5 minutes a first round of questions.
    I certainly appreciate the headway we have made since the 
former Chairman Steve Horn authored the original Improper 
Payments Information Act and got us on a good track to where we 
are today, almost 10 years later. It seems we certainly are 
doing a much better job as I referenced in my statement and you 
both have as well that we are now identifying the amounts and 
therefore, know what to go after, but it is still pretty 
significant.
    Mr. Werfel, in your written testimony you reference that 
not all errors are fraud, in fact, ``most payment errors are 
inadvertent,'' and you further say not all errors are waste, 
and in fact, ``significant amount of error is based on missing 
documentation.'' How would you roughly calculate percentage if 
it is not fraud, it is not waste, it is inadvertent and maybe 
missing documentation? Is that 50 percent of the $125 billion 
number; is it 75 percent?
    Mr. Werfel. There are a couple of answers. First, in terms 
of the overall error report portfolio, we think about one-third 
associates to the lack of appropriate documentation. That means 
we go down and we audit or sample the payment and test its 
accuracy and the people involved cannot provide us the relevant 
information for us to do an appropriate validation of whether 
the payment was accurate or not. Under longstanding audit 
principles, we don't assume the best, we assume the worse and 
we characterize that as an error. That is about one-third.
    What happens is later on as that documentation improves, we 
find not all of those payments turned out to be error. It 
reverts back to the general error rate that we see in 
government programs which is about 5 percent.
    Your other question about fraud is something that we are 
looking at but we don't yet have an exact percentage. What we 
see in the other two-thirds of the problem--I am being very 
general now--is most often the problem is an inability to 
validate eligibility or authenticity, whether data matches that 
should be occurring are not occurring or whether there really 
is at this time no third party data source to validate the 
current situation.
    In some cases, it turns out that our inability to validate 
eligibility is driven by the fact that we are actually being 
defrauded, that someone has set up a fake identity or a fake 
account of some kind. We believe based on all the information 
that we have that is a serious problem but it is not a large 
percentage of the problem. We just don't have the exact 
percentages at this time. In order to do so would take a 
different approach to our measurement that would involve a lot 
of resources and the community as a whole is considering and 
continues to consider whether to establish a particular fraud 
metric. It would be interesting to hear the interest of this 
subcommittee on that topic as well.
    Mr. Platts. I assume in the area of improper documentation, 
it is safe to believe that a lot of that relates to programs 
that are State-administered such as Medicaid where the 
verification is not done by a Federal entity but a partner at 
the State or local level?
    Mr. Werfel. It is a significant problem in State-
administered programs. You have 50 different administrations of 
the program, 50 different approaches, so we see sometimes the 
controls and the documentation, and the rigor with which 
programs are carried out at the State level vary greatly. That 
is one of the areas. You are right, we do not have as direct, 
immediate control over how those States are running their 
operations and what kind of internal controls they are putting 
into place to maintain good documentation. That is why it 
becomes very significant.
    Mr. Platts. On a specific program, the idea of whether it 
is more fraud or inadvertent, lack of documentation, Medicare 
fee for service, you reference in your testimony, the 
President's efforts to really go after improper payments in 
this category, certainly it is a good sign to go from an 
estimated 12.4 percent to now 10\1/2\ percent.
    In that specific program, what was the most significant 
change or effort that got us from over 12 down to 10, so we are 
coming down, and how would you characterize the issue of fraud 
versus inadvertent or lack of documentation?
    Mr. Werfel. That is a very good question. Medicare is the 
largest source of error in the Federal Government. It is 
obviously the top priority of the administration to address 
that because as we address and do a better job on that, the 
whole governmentwide error rate and improper payment problem 
shrinks.
    In terms of how they have been able to improve, the 
Medicare Program, the folks at CMS have had an ongoing and 
longstanding corrective action plan that continues to move 
forward and continues to get refined, and they continue to make 
more and more progress. It has multiple elements to it.
    They are holding providers more accountable for 
documentation, they are working with the provider community to 
understand what they are required to maintain in terms of 
documentation, so that problem is there. There are other 
elements to Medicaid error, whether they are doing a better job 
in identifying coding errors. For example, they reimburse for 
an MRI but only a chest x-ray occurred or we reimbursed for a 
$4,000 procedure when only a $1,000 procedure occurred. These 
sometimes are coding errors and they are building better 
automated solutions and contractor review modules that can pick 
up on these things.
    I think the real driver here and the most promising benefit 
to Medicare is their predictive modeling and their business 
intelligence and analytics, to identify procedures that look 
anomalous and activities that look anomalous. As the 
information age emerges, we become better at detecting these 
different trends with the data.
    Sometimes there is a legitimate provider who didn't realize 
the activities they conducted are technically not Medicare-
eligible and we need to train those medical providers better. 
In some cases, it is fraud.
    Mr. Platts. Just to conclude on that specific point, the 
business, the analytics and doing better, this is something the 
credit card industry is way ahead in. How are OMB specifically 
or departments individually trying to reach out to the private 
sector? I am a big guy with Discover Card. No annual fee, I pay 
it in full every month, cash back. But each year my wife has 
chaired the Teacher Appreciation Program at our local 
elementary school and one of the things was through the PTA to 
do a gift card for each teacher. My wife purchased them for the 
whole school, all the faculty and then is reimbursed by the PTA 
when they are provided, so there is a big charge out of the 
norm. I actually get a phone call from Discover, as the member 
of record, saying a big charge has been made 5 minutes ago. If 
there is a problem with this and you didn't authorize it, let 
us know right away.
    Mr. Connolly. Mr. Chairman, I would like that system that I 
get a call every time my wife put a big charge on the credit 
card. [Laughter.]
    Mr. Platts. I do sometimes, not in any distrust of my 
wife's spending habits, but Discover, but it is the example, 
saying something is out of the ordinary because of the amount 
of the charge. Those things happen when I make the charge too, 
Mr. Connolly.
    How are we doing as a government in trying to replicate and 
not reinvent the wheel but use the expertise from the private 
sector who had a real financial incentive to do this and they 
are doing it very well. Are we reaching out to the private 
sector or are we trying to reinvent the wheel instead of 
learning from what they have done?
    Mr. Werfel. An excellent question and to me it is one of 
the more exciting opportunities that we have. I used the phrase 
earlier leveraging the information age and that is a mantra 
that I have tried to promote within the community around this 
area.
    To answer your question more directly, I think we are going 
to look back and see one of the most critical moments in the 
history of our journey in improper payments as being the 
creation of the Recovery, Accountability and Transparency Board 
and some of the innovative things that have been going on at 
that board. They have really been serving as the major bridge 
between these cutting edge solutions, whether in the credit 
card industry, counter intelligence or otherwise and saying 
these solutions can be used in programs like Medicare and 
Medicaid.
    They demonstrated that during the Recovery Act where we 
started to get wind of some of the things they were doing by 
using data out there in the public sphere, gathering enormous 
quantities of data in real time and then using very 
sophisticated and well thought out algorithms, questions and 
queries of the data to say looking at this payment, it looks 
fine when I look at it like this but with the data I am going 
to twist it on its axis a bit and suddenly there are a bunch of 
red flags there.
    We were basically wowed by what they were able to do, so we 
started bringing in more and more agencies. They tell us they 
don't know what they are more busy doing, finding fraud or 
demoing the solutions to other agencies which I think is a 
great problem to have.
    Mr. Platts. That resource, they are serving as a kind of 
clearinghouse to educate and train departments and agencies to 
replicate what they are doing?
    Mr. Werfel. Right. One of the major moments was when we 
brought in CMS and they saw the solution. They have a forensic 
unit at CMS that does a good job, a very good job. They 
challenged the Recovery Board, said here is a bunch of data, we 
know where the fraud is within this data, let us see if you can 
find it. Not only did the Recovery Board find it, they found 
fraud that CMS had missed. They did it using a better, more 
comprehensive, different type of algorithm.
    CMS is very good, for example, at finding providers with 
unusual treatments like here is a provider in Texas who had 
seven of these types of treatment in the last few weeks and 
that is unusual. You don't see that kind of treatment out of a 
small provider. They forensically look at that stuff well. The 
Board's tool found identity fraud. It found a doctor in Texas 
using a license of a legitimate doctor in North Carolina, 
saying this doctor really doesn't exist. They had missed that 
in the CMS algorithms and forensics.
    The goal now is they shouldn't miss it anymore, so now CMS 
is creating a fraud lab where they have different types of 
people with different perspectives and expertise including some 
of the Recovery Board expertise driving to improve their 
overall algorithm.
    It is fantastic and it is going to take time before we see 
the full impact of the result, but they already have an 
investigation underway with an Inspector General around a fraud 
ring that was discovered through this.
    Mr. Platts. Good news that we are headed in the right 
direction.
    I appreciate my colleague's understanding in going well 
over my time, but I yield to the ranking member.
    Mr. Towns. Let me begin, Ms. Daly. Can you explain to me 
what a payment recovery audit is?
    Ms. Daly. Yes, sir. Payment recovery audits are actually 
audit tools, although not audits in the true sense of the word, 
typically performed by contractors who specialize in this area. 
They comb through invoices and other documentation that an 
agency maintains and identify improper payments that are in 
there and actually go out and recoup those improper payments.
    They typically work on a contingency fee basis, therefore 
there is little cost to whoever is employing them. These 
payment recapture audits or recovery audits are actually 
performed not just in the Federal Government, but in State and 
local governments and also in the private sector.
    Mr. Towns. In your testimony, both of you discussed the 
annual increases in improper payments. You said the government 
started out with $45 billion and reported improper payments in 
2004. You indicated 7 years later it was $125 billion in 
improper payments. That represents about a $70 billion increase 
in 6 years. Can either of you explain the cause for the major 
increase?
    Mr. Werfel. I think the biggest cause is just more programs 
reporting. When we first started on this journey after the 
Improper Payments Information Act was enacted in 2002, one of 
the first lessons learned was measuring error in programs isn't 
easy. It requires resources, expertise, creating partnerships 
with your funding recipients who now have to be subjected to 
these payment audits, so it took us a while on the learning 
curve to figure out the right and the appropriate way to 
measure a number of programs.
    That $45 billion that you referenced takes into account a 
smaller footprint of programs, so what happened each year is we 
have the good news of we measured three more programs, add 
their error, the next year we measure in five more programs, 
add their error and the error amount grows.
    The other cause is outlays. We outlaid significantly more 
money in 2010 than we did in 2004. Even if the error rate stays 
constant at 5 percent, if you are going from $100 to $1,000 to 
$100,000, even at a 5 percent error rate, the improper payment 
amounts go up. Those are the two causes.
    Without making any excuse, we still have a $125 billion 
problem that we need to solve. I have explained to you why it 
is increasing, but we need to be very, very focused on how to 
start turning that tide back the other way.
    Mr. Towns. Mr. Werfel, IPERA included many important 
provisions aimed at reducing improper payments. One provision 
relates to sanctions for programs that are not complying with 
the law. Specifically, if any agency is determined not to be in 
compliance for two consecutive years and the Director of OMB 
determines that additional funding would help the agency come 
into compliance, the head of the agency shall obligate 
additional funding in an amount determined by the Director to 
intensify compliance efforts.
    Would you please explain how you would determine what needs 
to be done at the agency level?
    Mr. Werfel. It is going to be challenging. I think one of 
the most important things that IPERA does that I am most 
excited about is it really integrates the Inspector General 
into this problem more than in the past. Because 2 years of 
non-compliance is based on a conclusion reached by the 
Inspector General and I am hopeful that in reaching that 
conclusion, the Inspector General is going to provide us some 
degree of a road map in terms of where some of the deficiencies 
are occurring and where the investments are needed.
    I also think the agencies on the management and payment 
side are also very dedicated. My vision is if we get to a place 
where we have an Inspector General who finds an agency has been 
non-compliant for two consecutive years, we are going to come 
to the table with OMB, the agency and the Inspector General and 
have a strong diagnosis of where the money can best be spent, 
where is the most positive return on investment.
    It is not going to be easy but I think with the right 
partnerships, we should be able to find the answers more often 
than not.
    Mr. Towns. My time has expired. Thank you, Mr. Chairman.
    Mr. Platts. Thank you, Mr. Towns.
    I now yield to the gentleman from Virginia, Mr. Connolly.
    Mr. Connolly. Thank you so much, Mr. Chairman.
    I really want to thank you for having this hearing because 
this is the kind of public policy thing I love to sink my teeth 
into and I look forward to working with you on followup 
legislation because I think this is a promising area. Not all 
of the Federal budget or Federal deficit lends itself to 
promise, this one does.
    I want to ask as many questions as I can fit in, so please 
try to be concise and bear with me.
    Mr. Werfel, if I understood your testimony, you talked 
about $125 billion in improper payments made last year. You 
said there was a goal to recapture $2 billion. That seems 
awfully modest.
    Mr. Werfel. I will try to be as concise as I can. The sweet 
spot for where you can recover error is recovering improper 
payments to vendors. The reason is the measurement that we have 
is real, every time we find an improper payment to a vendor, we 
can actually find the vendor, the date the payment was made and 
go back and get it.
    In the broader scheme, the way we estimate errors is we 
pull a small sample size and extrapolate that to a universe. 
For Social Security, which could have $1 billion in errors, we 
don't know in every case that it was John Smith or Jane Smith 
that got the error. We pull a sample size, say 400 or 4,000 
samples versus the actual 100,000 or 200,000 payments that were 
made. We only know about the errors in the small sample size. 
That is why.
    Mr. Connolly. Let me say to you as someone who ran a fairly 
large local government, I don't think you make a lot of 
progress unless you make heroic goals, stretch goals; $2 
billion doesn't cut it. It is not sufficiently robust, in my 
view. I understand the limitations but it is something I think 
we have to come back to, not when the universe is $125 billion.
    Ms. Daly, you indicated that Medicare prescription 
benefits, Part D, does not yet even track, but it is going to 
next year, improper payments, correct?
    Ms. Daly. Exactly. The Medicare Prescription Drug Benefit 
Program has actually done estimates on subsets of its 
population but does not have a total comprehensive estimate for 
that program.
    Mr. Connolly. That program has been in place now for how 
many years?
    Ms. Daly. I believe it was put in place in 2004, but I am 
not certain.
    Mr. Connolly. So we have 6 or 7 years of track record. That 
seems awfully sluggish to me. They have had plenty of time to 
get with the program, haven't they?
    Ms. Daly. I think they have been trying. As Mr. Werfel 
indicated, it is challenging to come up with a valid, 
comprehensive estimate for many of these programs. It is not 
always easy to measure where the errors are occurring.
    Mr. Connolly. Particularly with the doughnut hole, however, 
it just lends itself to gaming, some of which would be illegal 
one thinks. Prescription drug prices are all over the lot. 
There are discount drugs, generic drugs, brand drugs, expensive 
drugs, orphan drugs and all kinds of other things. It just 
seems to me that is ripe for the picking. I would hope we are 
going to put a lot of heat on them to make sure they get this 
program up and running.
    Mr. Werfel, in terms of analytical tools, I was intrigued 
by the chairman's recitation of how credit cards clearly have a 
monitoring system for ourselves and our spouses and we could 
learn a lot from the private sector. I thought I heard you say 
we are doing that on a pilot basis.
    I want to give you an opportunity with three things 
quickly. One, how do we expand that beyond a pilot so we are 
actually using the expertise of the private sector in the 
public sector given the amounts we are talking about?
    Second, in terms of diagnostic tools, what are we doing on 
the diagnostic end to better get a handle on what is the cause, 
a more accurate cause of improper payments?
    Finally, what incentives are we providing for agencies to 
have a better track record than $2 billion out of $125 billion?
    Mr. Werfel. The first question, we have definitely moved 
beyond the pilot phase, but I don't think we are where we need 
to be. I think the private sector is way ahead of us in terms 
of leveraging the type of information networks to find 
anomalies and errors, but we have isolated examples of success 
stories. Almost every agency has a forensic unit and we have 
some expertise in this area and we have brought them together 
in a working group recently to try to make sure we pushing 
ourselves to better and better things.
    The examples I provided are real. The Defense Department is 
one; they have a very sophisticated pre payment algorithm tool 
that they use that has prevented something like $1 billion in 
error over the last few years. The Recovery Board is real and 
it is happening today. CMS's Fraud Lab is real and is happening 
today.
    The reality, I would argue and my belief, is the credit 
card companies with the networks that they are developing are 
more sophisticated and ahead of us and we need to catch up.
    Your second question I believe was on diagnostics and root 
causes. I think that is an area of real progress that has been 
made since 2004. When we talk to agencies, it is not about a 
lack of understanding of what is causing the error. It is more 
what are the appropriate solutions. There are two things that 
drive our challenge on solutions.
    One is do we have the information that we need. Sometimes 
whether it is the Privacy Act or just the lack of an automated 
tool to pull it, we don't always get the information we need to 
validate. The second is the tougher we make the world for 
recipients to prevent improper payments, it can create other 
programmatic challenges. I often find myself in a meeting with 
an agency and say, here is how you do it, just create a policy 
that makes it much, much more difficult to get a payment error. 
That tends to have reverberations around the rest of the 
program and could either create access barriers or create other 
complications, so it is finding that equilibrium.
    I don't think I remember your third question.
    Mr. Connolly. The third question was are the right 
incentives in place for agencies to put together a robust 
program and making this a priority?
    Mr. Werfel. I think they need to be stronger. IPERA is a 
great start with the compliance penalties, the push to get this 
into performance appraisals. Earlier Chairman Platts referenced 
the audit situation. You are probably aware that on November 
15th of each year, agency financial statements are due and 
their audits are due. I always talk about in the push to 
November 15th, is remarkable how the agencies are so dedicated, 
working through the night, 17 hours a day and this tremendous, 
intense push to get our financial statements out on time and to 
get them with clean audits. I think if we can harness that 
energy, the accountability is there. The CFOs take it 
personally if they don't get a clean audit, it is a big deal. 
If we can somehow harness that energy around this problem, I 
think you would see a tremendous change. That is something I 
want to promote with this subcommittee.
    Mr. Platts. I thank the gentleman.
    Before I yield to Mr. Guinta, just to follow on that, the 
premise that the audit of the internal controls that we 
required of DHS was, I believe, one of the keys to their 
getting on a good track. As you referenced, someone could get a 
clean opinion on their annual audit, yet have $100 billion of 
improper payments going out the door because the audits we are 
doing now don't go after identifying those improper payments, 
just that they can account for the money, not necessarily that 
it was properly spent.
    With that, I yield to the gentleman from New Hampshire, Mr. 
Guinta.
    Mr. Guinta. Thank you, Mr. Chairman.
    Thank you both for your testimony.
    First of all, the number $125 billion, how accurate is that 
number?
    Mr. Werfel. I will give that to the auditor.
    Mr. Guinta. I know that is a reported number, but what 
would be your guesstimate of additional moneys that we are not 
identifying in overpayments or improper payments?
    Ms. Daly. That is the unknown answer because we have to 
wait until an empirically sound method is developed for 
providing an estimate. Right now, the best we know is that it 
is $125 billion for 2010. We do know there are at least seven 
major risk susceptible programs that have not reported. I can't 
give you a sense of how much those particular programs may have 
in improper payments or others where they maybe tightening up 
their methodologies and moving forward that might provide a 
more precise estimate for programs that have already reported.
    That happened a year or so ago with the Medicare fee for 
service program. They initially reported an estimate for 2009 
of about $24 billion and then applying a more stringent 
methodology, raised that estimate to about $35 billion. That is 
a case where when they do a more precise estimate, they are 
able to identify what the various reasons and causes are.
    I wanted to add to something discussed just a minute ago 
that I do think the estimates coming out are getting better, 
but it is also very important to have consistency in measuring 
because that way you are comparing apples to apples and you 
don't have the differences that may come about just because you 
are using a different approach in your measurement.
    Mr. Guinta. In the seven major programs not reporting yet, 
which are the top two?
    Ms. Daly. Medicare Prescription Drug and then I believe 
TANF would be the next larger dollar value program that has not 
reported.
    Mr. Guinta. Over the last 5 years, has this number been 
roughly the same, this $125 billion or has it progressively 
increased?
    Ms. Daly. The number has been progressively increasing. 
Last year's estimate was $109 billion. Prior to that, I have to 
check a cheat sheet, if you don't mind, I believe the number 
was $72 billion in 2008, $55 billion in 2007, so we have seen a 
consistent progression upward. As Mr. Werfel indicated, a lot 
of that is because there are more programs reporting every 
year.
    Mr. Guinta. Do you have a breakdown of how much would be 
Medicare and how much would be Medicaid?
    Mr. Werfel. I can answer that question. It is a very large 
portion in Medicare fee for service, $34.3 billion in error and 
Medicare Part C, $13.6 billion, and in Medicaid, $22\1/2\ 
billion. That is more than half our balance sheet on error just 
in Medicare and Medicaid alone.
    Mr. Guinta. Is there ever a likelihood of us achieving real 
savings in these three areas? When I say real, I mean 70, 80 or 
90 percent?
    Mr. Werfel. Yes, but it is going to take time and it is 
going to take congressional help. For example, there is in the 
President's 2012 budget a series of program integrity proposals 
for a variety of different programs, but in Medicare alone, our 
proposals, we believe if enacted, would have the impact of 
saving $42 billion over 10 years if you combine the legislative 
proposals we are seeking and some additional funds to do 
program integrity work. That doesn't get you to the 70 or 80 
percent, but again, we think this is an extremely important 
step to be taken.
    Mr. Guinta. Would you send some of those recommendations to 
my office? I don't know if other Members would like them, but 
if you would, I would like to take a look at that.
    Mr. Werfel. Absolutely.
    Mr. Guinta. Thank you. I yield back.
    Mr. Platts. I thank the gentleman.
    I yield to Mr. Lankford from Oklahoma.
    Mr. Lankford. Thank you.
    I would say keep going. There are a lot of people counting 
on you based on the budget and the American people looking 
forward to getting some of this cleared up over time. This has 
been a long ongoing process. It is not a simple task by any 
means, we understand that, but keep going with what you are 
doing.
    Mr. Werfel, you know my propensity on some of the Web sites 
that we have on the dot govs. Can I ask a quick question on the 
paymentaccuracy.gov? How is that connected and are there other 
places that people can go to be able to find that and track it? 
Is the information connected to data.gov and other places as 
well as the agency's Web site as well so it is easy to identify 
and find?
    Mr. Werfel. That is a good question.
    First of all, just to promote the Web site, 
paymentaccuracy.gov, we have been pleasantly surprised with the 
number of hits and foot traffic we get on the site. It is a 
well visited site and we are very excited about that.
    I can't say that we have the perfect architecture of all 
the different links but there are a lot of different 
opportunities to get there. In particular, it is in our USA 
spending family and I would say that is probably our most 
visited Web site in this terrain, so I think that is most 
critical.
    Mr. Lankford. I would continue to encourage you to find a 
central portal that we can promote as a Federal Government site 
and say if you are looking for something, you can go here, get 
a chance to connect and jump off and it is also searchable so 
you can connect and it connects with different things rather 
than having to search in one, search another and another and be 
able to track it.
    The consequences for an employee, vendor or contractor that 
were discovered in improper payment, how is that working? We 
talked about incentives. Obviously we want incentives for the 
agency to be able to find and reuse that money in other areas 
if it is done appropriately. What are the consequences, give me 
some examples of that?
    Mr. Werfel. I think the major consequence is that once a 
payment is identified as error, and we identify the vendor that 
received the error, if they don't pay back the money in a 
timely way, we have a suite of different activities we can 
undertake to enforce that debt collection. One of the things I 
am working to do with the procurement community is to figure 
out all the additional steps we can take.
    When we make a payment error to a vendor, that is the 
United States making an error. I believe the vendor has an 
obligation to report that error as soon as possible. So we are 
looking at ways--we haven't identified the perfect solution--to 
increase the vendor's responsibility to help in this hunt for 
improper payments.
    Mr. Lankford. There is both a balance in that because I 
have talked to a physical therapy center in Oklahoma City not 
long ago and they had a longstanding battle with Medicare 
reimbursements where they would get a random contact saying 
this was inappropriate. They would pull their file and say no, 
it was very appropriate, here is the code. I am sure it is 
being identified as inappropriate, they are telling me no, I 
have the full verification, this is the right code, this is the 
right thing.
    How are we hitting that balance between the two where we 
don't have an individual vendor that is being crushed in the 
process and having to fight for a year to get the payment they 
deserve versus finding real fraud and saying we have to sniff 
this out? There has to be a balance.
    Mr. Werfel. You are hitting on the central issue. I made 
this point in response to Congressman Connolly's question. 
There is a tension when I sit in a room with an agency, often I 
say, why can't we do this more aggressively? Why can't it be 
more comprehensive? Why are you waiting until you are 95 
percent confident to go after an error? Why don't you go after 
an error when you are 80 percent confident and cast a wider 
net?
    The issue that it creates more false positives and it 
creates the potential for more litigation and inequity, so the 
question is finding that right equilibrium and finding that 
right balance plane.
    Mr. Lankford. If there is some way to be able to notify the 
vendor that this is something that is suspicious, if you would 
provide some simple documentation to make sure we can clear 
that up, that would certainly help rather than the cutoff point 
of saying, we think it is, reimburse our money to us, pay us 
whatever it may be. It provides some sort of interim step that 
would be very helpful in that process on both sides. We want to 
be able to tell people we are tracking it aggressively. If more 
people are getting that contact and saying we are watching, 
that helps. If more people are finding, I had better pull this 
and have my documentation in place, that is a helpful thing.
    It is somewhat disturbing to hear about Medicaid, dealing 
with $22 billion in this abuse, fraud, whatever it may be, 
whatever we are going to call it. That is running 8 to 10 
percent of Medicaid costs, a significant amount that we are 
processing. I would encourage we continue in any way we can to 
track that.
    Is there a single area you can look at and say this is the 
big issue with Medicaid and why we are having so much come out 
of it? Is there anything that comes to the top of that $22 
billion?
    Ms. Daly. Actually, the agency reported that typically for 
both Medicare and Medicaid, they have medical necessity issues, 
trying to determine whether the medical procedure should have 
been performed. Oftentimes it is, as you mentioned, things like 
insufficient documentation commonly reported as one of the key 
causes of improper payments for those programs.
    Eligibility status is another for Medicaid that you don't 
see for Medicare. Typically, these are the causes that the 
agencies report are contributing to those estimates of improper 
payments.
    Mr. Werfel. I would add one thing to that. The other 
challenge HHS has on the Medicaid front is 50 different States 
running 50 different Medicaid type programs. It is sometimes 
difficult to say here is a unifying solution to our eligibility 
or documentation problem. It doesn't always translate for every 
State. It just means we have to work harder and get more 
granular in our solutions on a State by State basis. I think 
CMS is doing that but clearly at $22 billion, a lot more needs 
to be done.
    Mr. Lankford. On our side legislatively, we are working on 
correcting that with the budget we are putting out today on the 
House floor, block grants, Medicaid back to the States, it puts 
the accountability side on them. We are dealing with 50 
different States and we are trying to resolve that in a 
different way.
    I appreciate that and I yield back.
    Mr. Platts. I thank the gentleman.
    We are honored to be joined by the distinguished Chair of 
the full Committee on Oversight and Government Reform from 
California, Mr. Issa.
    Mr. Issa. I thank the chairman. I apologize for not being 
here for the whole hearing but we are doing two at once, so I 
was over in National Security.
    Mr. Werfel, I sent you a letter about a month ago that 
today happens to be miraculously the deadline, that asked what 
your policy was and the basis for not sitting on panels if they 
weren't to your liking. Am I going to see that letter today?
    Mr. Werfel. I believe we are on track to get you a response 
today, yes.
    Mr. Issa. Today will end soon, you know.
    Mr. Werfel. At OMB, our COB is later than normal, but we 
will get yours.
    Mr. Issa. As you are finalizing it, since it is not here, I 
understand a longstanding policy for this committee is not the 
2-years in which the Obama administration had your own party 
looking over your shoulder, it has to be a basis that would 
transcend any one administration. Otherwise, it is an 
administrative choice which is not acceptable to the other body 
that has the obligation for oversight, so hopefully your answer 
will be creative and maybe a yes, we will come more often.
    Mr. Lankford was asking about the false positives and so 
on. Two days ago, I was in front of one of the many groups we 
keep bringing in from AmericanJobCreaters.com, people who are 
talking about abuse within the Federal system, talking about 
the checks and balances, the absence of the ability to track in 
real time, waste, fraud and abuse. I asked them because we were 
on the subject how many of you have received a call from Visa 
or Master Card telling you that there is a suspicious problem? 
Virtually every hand went up. It was probably 80 percent at 
least.
    Then I asked how many of you had identity theft or your 
card actually stolen? About four hands went up, one of whom was 
on my staff. The amazing thing was I asked if anyone was upset 
and they said, of course not. Why? Because it reduces the cost 
of that card. If it wasn't for the millions of false positives 
that are asked and explained, the cost of those cards would go 
up by multiple percentage points because, as you know, Master 
Card eats the losses.
    My question to you is, why in the world wouldn't you 
develop a system that would allow you to basically be false 
positive ten times, twenty times more often, ask the question 
and in an analytical and inexpensive way accept the answers and 
then sift through those answers? Why isn't that the approach 
since it works for VISA and Master Card in real time and for 
us, it doesn't work so well the way we're doing it?
    Mr. Werfel. That is a very good question, a challenging 
question and I can assure you, Congressman, I am typically the 
person at the table pushing for a broader net and a more 
aggressive posture so that we can drive down errors.
    Coming back at me across the table are very legitimate 
programmatic and policy concerns, in particular the concern 
that setting up these types of internal controls and stop 
points or moratoriums on payments or keeping a payment from 
going out the door can create situations not only in which an 
eligible beneficiary is denied a payment, but also can create 
the risk of litigation and due process that can slow down the 
process.
    Mr. Issa. May I stop you for a second? I would narrow my 
concern and request. Unless they don't get answers after a 
period of time, your credit card doesn't actually get frozen, 
so let us go back again. Why wouldn't you send them out and 
expect responses and not necessarily shut off the payment, but 
simply increase because so much of this to the physicians and 
others can be done electronically, why wouldn't you send out 
and only when there is a complete absence of response, multiple 
times or if you take what you are presently sending and do stop 
if you don't get the answer you want, and add nine times more?
    But you don't stop except for the ones you are already 
stopping, all you are really doing is creating the alert, 
improving the system and eventually eliminating some of the 
false positives if you have a quality circle where you are 
learning from it. Why isn't that at least on a pilot basis on 
your radar screen to basically make Medicaid and Medicare 
oversight similar to credit card companies that can do this so 
automated and so efficiently that you are talking about a 
fraction of the fraud and the cost?
    Mr. Werfel. It is totally on our radar screen and it fits 
right into our strategic plan.
    Mr. Issa. Then I am going to ask one more because my time 
has expired and I want to be conscious we also have a vote.
    The President's fiscal year 2012 budget appears as though 
the Board success is being rolled into the Department of 
Treasury's Bureau of Public Debt for the creation of yet 
another new system. Why is it we would spend $10 million to 
take a program that has proven its successfulness because it 
didn't fall into Treasury's existing trap. It especially makes 
health care reform look less complicated when you look at all 
the report ``froms'' and the report ``tos.''
    Why in the world would we do that? Isn't the Board proof 
that you have to do it differently and not simply roll it into 
one more report? Ms. Daly, I think I will start with you on 
that because from an efficiency standpoint, I think you see 
what we are getting to.
    Ms. Daly. Yes, Congressman. I am really not familiar with 
the particular proposal you are talking about but I can say the 
Board did identify a number of very promising techniques that 
could and should be used throughout the government to try to 
help prevent improper payments.
    Mr. Issa. Mr. Werfel.
    Mr. Werfel. I have a couple of responses to that.
    Mr. Issa. You do ask for more money to move it than it 
costs to produce it, just in case you are looking at the scale.
    Mr. Werfel. On the one hand, I will say that I have talked 
to Chairman Deviney about the possibility of defraying some of 
the costs by leveraging the hardware/software and expertise 
that he has, but he is an independent entity and I would never 
presume to ask for the keys to his car. I want to make sure 
that he understands that we want to emulate what he is doing 
because it is a best practice and figure out the best way to 
emulate it. If we can leverage his infrastructure to make our 
endeavor less expensive, and he would agree, that is definitely 
a path forward.
    In terms of Treasury, I think we can be extremely 
successful in deploying this technology at Treasury. Treasury 
makes almost all the payments for the Federal Government 
ultimately. They take the information from the agency and they 
cut the checks, as I am sure you know. That means all this 
information is flowing centrally into Treasury. They have what 
I believe to be the bench strength, the expertise and the right 
network and relationship with the agencies to develop a very 
powerful fraud detection technology that can centrally utilize 
some of these credit card neuro-networks that you referenced 
earlier.
    We have to find a place for it and it seems to me that 
finding the place where all the information converges before 
the payment goes out seems logical. If there are concerns with 
Treasury in terms of their operations, let's talk about them, 
sort through them and see if we can find corrective actions, 
but from a design standpoint, I think we have a strong argument 
around Treasury as being the right location.
    Mr. Issa. Very good.
    Mr. Chairman, Chairman Deviney has told us he is more than 
willing to meet with all the parties. I would suggest that a 
less formal environment with the chairman, members of our 
committee and staff and people from your organization might be 
the best way to strategize whether or not the keys to the car 
could be handed over in a more efficient fashion.
    Thank you. I yield back.
    Mr. Platts. I thank the chairman. Certainly that focus of 
learning what has been done and applying it in the best way is 
what we want to be about. I appreciate the chairman's 
participation here today.
    I yield to the gentlelady from the District of Columbia, 
Ms. Norton.
    Ms. Norton. Thank you, Mr. Chairman.
    I note a great deal of executive action. After all, these 
are agencies under the control of the President. An Executive 
order in November 2009, another memorandum on finding the 
payments in March 2010, followed in June by what I really like, 
a Do Not Pay List, is this the first time there has ever been 
an Executive order on this subject?
    Mr. Werfel. Yes, Congresswoman. This is the first Executive 
order that I am aware of that is dedicated to this problem. As 
you just noted, I have served under multiple Presidents and I 
have never seen this level of attention to the improper 
payments problem coming from a President.
    Ms. Norton. This looks like a real focus that has been 
continuous and systematic. It is frankly very impressive, 
particularly considering how difficult it is to recoup money if 
some agency writes you and says they have overpaid you like the 
IRS and they want their money back. That is enough to send you 
up the wall.
    I am satisfied that we have the first systematic effort to 
do something about a problem that is, to say the least, elusive 
and difficult because you have to deal after the fact. When you 
see how large the government, it is inevitable absolutely that 
there would be overpayments.
    I am always interested in the cause because prevention 
seems the best strategy. I am sure you may have spoken of the 
causes. Based on some of the figures I have from OMB, I want to 
ask you about improper payments when one looks comparatively, 
and we are looking at very different agencies, so I don't know 
how to evaluate the different agencies.
    For example, you have Medicare fee for service and improper 
payment amounts, $34.3 billion. That is a rate of 10\1/2\ 
percent. When I first saw that, I thought the money goes 
through so many hands, maybe it has to do with that. Then I 
looked at the national school lunch program where I don't think 
anybody has to put up any money and that rate of overpayment 
was 16.3 percent. I am trying to get a grip on some anchor 
factor that may lead to overpayments because if you retrace 
that, maybe you could know how to prevent it.
    Do you have any insights into why, for example, school 
lunch would have such great overpayment percentage than 
Medicare fee for service?
    Mr. Werfel. Congresswoman, certainly this is something we 
have studied very closely to try to understand the root causes. 
I think we are in a good place right now to understand those 
root causes. Our challenge has been finding the right 
solutions.
    To answer your question directly, eligibility is a key 
issue across the board for programs generally, confirming 
eligibility and eligibility is often driven by factors like 
what the household size is, what their adjusted gross income 
is, what their assets are in order to determine whether they 
are the right population to receive this particular income 
maintenance or social benefit.
    It is no different in school lunch. We have a lot of school 
districts with a variety of different procedures in place to 
make sure the right kids are receiving subsidized or free and 
reduced price lunches. When we audit it, we find that 
overpayments are made in the form of a greater population of 
children receiving the school lunch subsidy than otherwise 
would if the requirements were technically followed.
    Ms. Norton. That is very helpful. You see the low rates for 
disability insurance, the Social Security Administration.
    Mr. Werfel. Correct.
    Ms. Norton. That is 0.05 percent there. Does it have to do 
with experience? Does that have to do with what it takes to 
qualify because you would think the same would be true in terms 
of qualifications being so nailed down, the same would be the 
case with Medicare fee for service. We know exactly who those 
people are or aren't. Does that have to do with the hands 
through which it goes and the providers whereas with disability 
insurance, you have a very low rate which perhaps goes through 
less hands or fewer hands?
    Mr. Werfel. That is a very good question. My answer to that 
question is the Social Security Administration has a direct 
connection to the beneficiary it is paying. The process is one 
straight line from the Social Security Administration 
determining eligibility to the payment and it is a unified 
system throughout whereas school lunch is 50 different States, 
different State Departments of Education.
    Ms. Norton. Medicare fee for service, you would think there 
is a straight line there between the physician or whoever gets 
the money, the State or whoever.
    Mr. Werfel. Medicare is unique in terms of one of the major 
drivers of error is a cousin of eligibility, it is medical 
necessity. Medicare is probably the most challenging of all the 
programs because, for example, a patient comes in and the 
doctor makes a decision on the spot to keep that patient 
overnight but when you go back and look at it, Medicare only 
would have reimbursed for an outpatient experience. That is 
about training doctors and figuring how to better understand 
the decisions that are made. It is an enormously complex 
challenge because it is very difficult to validate medical 
necessity in real time. That is why you see such high numbers 
in Medicare.
    Mr. Platts. I apologize to the gentlelady, but I have to 
run to the floor.
    Ms. Norton. I appreciate your graciousness, Mr. Chairman.
    Mr. Platts. As we have seen here on both sides, there is 
tremendous interest in the issue and I want to wrap up quickly.
    When Mr. Lankford talked about block granting Medicaid, I 
know it is a controversial issue, but it is to go after the 
issue of saying to the States, we are going to give you a block 
grant of money so they then buy in and have much greater 
incentive to go after the improper payments than today when we 
are paying 57 percent, they are paying 43. They have less 
incentive than when it is their own money. I think that is what 
Mr. Lankford discussed, to after school lunch where it is local 
verification. If we are paying the bill, they are not as 
concerned because we are paying the bill.
    The bottom line is we want to work with you, with the 
administration, both sides of the aisle, with the committee and 
really partner with you. I know Mr. Towns and Mr. Connolly both 
have talked to me about partnering with me. I think Mr. 
Lankford and others on this side want to work with you on 
legislative fixes that we need to help you go to the next step, 
also how we can partner with the administration on getting the 
Department of Transportation and the Postal Service to comply 
with the original Improper Payments Act to adequately identify 
the possible risk.
    Any way we can work together, the bottom line is to 
identify improper payments and how to prevent them in the long 
term or recovery when they are made.
    We appreciate you both being here. Mr. Werfel, you were in 
the hot seat a little here but we are glad to have the 
partnership we have with you and your office and look forward 
to continuing that and working closely with you.
    We will keep the record open for 7 days for any additional 
information you would like to provide or any statements Members 
would like to submit for the record. We thank you for your 
testimony.
    This hearing stands adjourned.
    [Whereupon, at 11:27 a.m., the subcommittee was adjourned.]

                                 
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